Top-rated Indian companies issue bonds at near-govt borrowing rates

Top-rated Indian corporates are raising funds from debt markets at rates only marginally higher than the government, as investors rush to pick up high-quality bonds amid low supply.

The spread between 5-year 'AAA'-rated corporate and government bonds has shrunk 17 basis points to 25 bps since January, while the spread between both 3-year securities, has halved over the same period.

Typically corporates have to pay higher rates to compensate for the greater perceived risk, but top-rated companies are currently paying close to 7.50% for three-year funds and 7.55% for five-year debt.

"We are seeing this because of fears that supply may or may not be there," said a trader at a large state-run bank.

In the second half of last year, banks, pension funds and insurance firms waited for corporate bond supply, which did not materialise, added the trader, who declined to be named.

Even as the economy recovered, corporate bond issuances were down by more than a fifth between April and August this year compared to the same period before the pandemic, in 2019.

This resulted in higher-rated corporates being able to raise funds at close to the borrowing rates for government debt, the safest asset on the Indian market.

For instance, infrastructure finance firm REC Ltd on Wednesday set the annual coupon for bonds maturing in three years and five months at 7.32%.

The three-year government bond yield was at 7.17% during that time on a semi-annual basis, which if annualised, comes around the same level.

Much of the benefit of lower rates is restricted to 'AAA'-rated corporates.

"'AA'- or 'A'-rated corporate bonds never got the advantage of excess liquidity during COVID as people did not want to take on risk", said Ajay Manglunia, managing director at JM Financial.

"Only when the rates for government security to 'AAA' bonds normalise, people get better appetite for lower-rated segments."

SPREADS MAY RISE

The spreads may rise from here on, say analysts.

India's liquidity surplus had been easing in September and slipped into deficit this week for the first time in more than three years, sending a signal the era of cheap money may be over.

That, in turn, may prompt more companies to front-load borrowings.

"In a rising rate environment, everybody would like to freeze their cost rather than keeping it uncertain," Manglunia said.

The likes of State Bank of India, ICICI and Bank of Baroda have tapped the market over the past month and are expected to require more funding to cushion their capital position.

"As banks move around looking for liquidity from markets, they will pay a price for it, and that will get transmitted to the borrowers," said Anand Nevatia, fund manager at Trust Mutual Fund.

In addition, as private investment picks up, companies from sectors such as power, industrials and consumer goods are likely to seek funds for capital investment, investors said.